(Bloomberg) -- A Korean EV battery stock that is the top performer on the country’s small-cap index this year just got its first sell rating, sounding a note of caution for retail investors who have been piling into the sector’s shares.

Ecopro Co., the holding company of battery materials supplier Ecopro BM Co., slumped almost 17% on Wednesday, the most intraday since January 2022. That’s after Kim Hyunsoo, an analyst at local brokerage Hana Financial Investment Co., downgraded the stock to reduce from buy, saying it was time to “carefully review its appropriate value.”

The stock’s 647% surge in the year through Tuesday made it the biggest gainer on the Kosdaq Index, which is up 31% in 2023. Ecopro traded at about 34 times its one-year forward earnings on Tuesday, versus a five-year average multiple of around 11.

The firm and its unit — whose shares are also up more than 200% this year — have been at the center of the dizzying surge in stocks related to the EV battery space, thanks to Korean retail investors’ love for anything tied to the EV supply chain. Interest has grown as dominant Chinese peers face more scrutiny from the US, and after local semiconductor and automaker stocks lost momentum.

Developed nations’ energy supply chains exiting China boosts visibility for South Korea’s battery sector — but there’s huge risk over the next five to seven years about the direction things will take, Kim wrote in a report titled “Great Company But Bad Stock.”

Korea’s retail traders have bought a net $3.6 billion of Kosdaq shares so far this year, with Ecopro and Ecopro BM being their biggest buys, exchange data compiled by Bloomberg show. Foreign and local funds are net sellers of Kosdaq equities.

The current stock valuation reflects the positives, Kim said, adding that one should “be wary of both FOMO buying and avoiding.”

Ecopro’s stock now has two buys, one hold and one sell rating, data compiled by Bloomberg show. Kim raised his price target to 454,000 won, which still implies a downside of about 30% from current levels.

Ecopro BM’s shares have been downgraded by at least three local brokerages this week. The stock has 22 buys, four holds and six sell recommendations. Its shares slid as much as 5.9% on Wednesday.

Lithium Frenzy

The downgrades come as some market watchers have cautioned that the rally in the sector has become excessive. The past few months have seen retail investors hunt for all things related to lithium — a key battery material — sending shares soaring even in little-known companies.

The rapid climb has also prompted short sellers to take bets against EV-related stocks, setting up a duel with day traders.

Trading firm Kum Yang Co.’s shares have surged more than fivefold since a local media outlet report in mid-October that the company signed a memorandum of understanding to develop a lithium mine in the Democratic Republic of the Congo. Hydro Lithium Inc.’s shares have doubled this year. That’s after the stock soared 1500% in 2022, when the new owners of little-known civil-engineering firm Korea SE Corp. changed its name to Hydro Lithium.

READ: Kum Yang Surges as Yuanta Sees Kospi 200 Inclusion

A lithium connection is also helping spark gains in Korea’s steelmaking behemoth Posco Holdings Inc. Its shares are up 48% this year, set for their best annual performance since 2016, with analysts citing expectations for its lithium business to boost its price.

READ: Posco Group, Honda Sign Partnership MOU in Steel, EV Materials

“Growth potentials have been too excessively priced-in,” Huh Nam-Kwon, chief executive officer at Shinyoung Asset Management Co., said referring to stocks in the overall EV battery sector in Korea.

©2023 Bloomberg L.P.